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February 28, 2006

How Property Taxes (Don't) Work: Indiana's $400 Million House

Porter County, Indiana faces a bit of a fiscal jam this year due to a monumental goof in the county's property tax assessment computer program. The Chicago Tribune has coverage here.

In general, local property taxes work like this:1) First the assessor figures out how much all the property in a district is worth.2) Then elected officials figure out how much property tax revenue they need to raise that year to fund public services.3) Last, lawmakers figure out the necessary tax rate by dividing their revenue goal by the value of all the property. If you've got $1 billion worth of property in a town, and you need to raise $10 million, then a 1 percent tax on all properties will cover it.

What went wrong in Porter County was that one particular home was accidentally valued, for tax purposes, at $400 million. The glitch wasn't discovered until everyone else's bills had been sent out. Following the (made up) example above, Porter County thought it had $1 billion worth of property to tax, but it really only had $600 million. Since the property tax rates were predicated on there being $1 billion of property worth to tax, the rates as applied to the smaller, corrected property values will bring in a lot less money-- and there's nothing Porter County can do except to figure out a way to do without the lost revenue.

If there's a lesson here, it's that the basic "best practices" experts usually recommend for modernizing property tax systems--including regular property assessment and a computer-based system for assessing properties--are no guarantee that dumb mistakes won't be made. It's important to ensure that your district is valuing property accurately-- but it's equally important to ensure that whoever does the data entry isn't all thumbs.

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The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state - Adam Smith, An Inquiry Into The Nature and Causes of the Wealth of Nations, 1776